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CIRCULAR

Guiding the regime of setting up and use of financial provisions for in-stock goods price decrease, loss of financial investments, bad debts and warranty for products, goods and construction works at enterprises

In order to create a fair business environment for Vietnamese enterprises, the Finance Ministry hereby guides the setting up and use of financial provisions at enterprises for in-stock goods price decrease, loss of financial investments, bad debts and warranty for products, goods and construction works, as follows:

I. GENERAL PROVISIONS

1. Subjects of application:

Enterprises established under the provisions of Vietnamese law (including foreign-invested enterprises).

For joint-ventures enterprises established on the basis of agreements concluded between the Government of the Socialist Republic of Vietnam and foreign governments and containing provisions on setting up and use of financial provisions different from the guidance in this Circular, the provisions of such agreements shall apply.

2. Enterprises are allowed to set up the following provisions:

a/ Provision for in-stock goods price decrease, which means a provision for a value lost due to decrease of prices of in-stock supplies, finished products and/or goods.

b/ Provision for loss of financial investments, which means a provision for a value lost due to decrease of prices of assorted securities invested by enterprises; and for the value of financial investments lost due to loss-making operation of economic organizations in which enterprises are investing.

c/ Provision for bad debts, which means a provision for the lost value of overdue receivable debts, and undue receivable debts which are possibly irrecoverable due to insolvency of debtors.

d/ Provision for warranty for products, goods and/or construction works, which means a provision for expenses to be spent on products, goods and/or construction works which enterprises have sold or handed over to buyers but are still obliged to continue repairing or improving them under contracts or commitments with such customers.

3. The four provisions defined in Clause 2 above shall be deducted in advance as enterprises' business operation expenses in the reporting year and constitute a financial source to offset possible losses in the plan year, so as to preserve their business capital and ensure that enterprises reflect the value of their supplies and goods in stock and financial investments not higher than their market prices and the value of their receivable debts not higher than the recoverable value at the time of making financial statements.

4. The time of setting up and refunding provisions shall be the end of the accounting year. Where enterprises are allowed by the Finance Ministry to apply a financial year other than the calendar year (which begins on January 1 and ends on December 31 each year), the time of setting up provisions shall be the ending day of the financial year.

Particularly, listing enterprises which are required to make their financial statements in mid-year may set up and refund provisions at the time of making mid- year financial statements.

5. Enterprises must set up councils for evaluation of the level of provisions to be set up and handling of actual losses of supplies and goods in stock, financial investments, irrecoverable debts according to the provisions of this Circular and other relevant legal documents. Particularly, the provision for expenses for warranty of products, goods and/or construction works shall be set up under contracts or commitments with customers.

A council shall be composed of the director, the chief accountant, heads of concerned sections and some experts if necessary. The enterprise director shall decide on the setting up of the council.

II. SETTING UP AND USE OF PROVISIONS

Basing themselves on actual fluctuations in prices of in-stock goods, prices of securities, values of financial investments, bad receivable debts and committed warranty for their products and goods, enterprises shall take initiative in determining the level of each of provisions to be set up, using them for proper purposes and handling them according to the following specific regulations:

1. The provision for in-stock goods price decrease:

1.1. Objects for which the provision is set up include raw materials, materials, supplies, goods and finished products in stock (including also in-stock goods which are deteriorated, degraded, outmoded, technically obsolete, backward, unsold or slowly circulated), unfinished products, charges for uncompleted services (hereinafter referred to as in-stock goods for short), which have their original prices recorded in accounting books higher than realizable net values, and satisfy the following conditions:

- Having lawful invoices and vouchers according to the Finance Ministry's regulations or other documents proving the costs of in-stock goods.

- Being under the ownership of stocking enterprises at the time of making financial statements.

Where raw materials and materials have realizable net values lower than their original prices while the selling prices of products or services made from such raw materials and materials do not decrease, no provision for decrease of prices of such in-stock raw materials and materials shall be set up.

1.2. Method of setting up provisions:

The level of provision to be set up shall be calculated according to the following formula:

Level of provision for decrease of prices of supplies and goods

=

Quantity of supplies and goods actually in stock at the time of making financial statement

x

Original price of in-stock goods recorded in accounting books

-

Realizable net value of in-stock goods

The original price of in-stock goods covers buying cost, processing cost and other directly related costs according to accounting standard No. 02 - goods in stock, promulgated together with the Finance Minister's Decision No. 149/2001/QD-BTC of December 31, 2001.

The realizable net value of in-stock goods (value expected to be recovered) is the selling price (estimated) of such in-stock goods minus the cost for finishing the product and sale expense (estimated).

The levels of provision for in-stock goods price decrease to be set up shall be calculated for each kind of in-stock goods with decreased price and all shall be presented in a detailed list, serving as a basis for accounting such provisions into the cost of goods sold (production cost of all products and goods sold in the period) of the enterprise.

Particularly for uncompleted services, the provision set up for in-stock goods price decrease shall be calculated for each type of service having a specific charge rate.

1.3. Handling of the provision:

At the time of setting up the provision, if the original price of in-stock goods is higher than their realizable net value, the provision for in-stock goods price decrease shall be set up according to the provisions of Points 1.1 and 1.2 above.

- If the amount of the price decrease provision which must be set up is equal to the balance of the existing provision for in-stock goods price decrease, then the enterprise shall not have to set up such provision;

- If the amount of the price decrease provision which must be set up is larger than the balance of the existing provision for in-stock goods price decrease, then the enterprise shall add the difference to the cost of goods sold of the enterprise.

- If the amount of the provision which must be set up is smaller than the balance of the existing provision for in-stock goods price decrease, then the enterprise shall refund the difference as the enterprise's other incomes.

1.4. Destruction of supplies and goods for which the provision has been set up:

a/ Unsold goods which are beyond the expiry date, degraded, contaminated or deteriorated and therefore no longer usable, such as pharmaceuticals, food, medical supplies, breeds, livestock and other supplies and goods, and must be destroyed, shall be handled as follows:

A council for handling of the enterprise's assets shall be set up to evaluate assets to be destroyed. The evaluation minutes must specify names, quantity and value of goods to be destroyed, reasons for destruction, value recovered from liquidation sale, and value of actual damage.

The value of irrecoverable actual loss of each kind of unsold goods shall be the difference between the book value and the value recovered as a result of liquidation (compensations paid by damage-causing persons or liquidation sale of goods).

b/ Handling competence: The Managing Board (for enterprises with managing boards) or the Members' Council (for enterprises with members' councils); the general director or director (for enterprises without managing boards); or the owner of the enterprise shall base itself/himself/herself on the minutes of the handling council and evidence related to unsold goods to decide on the destruction of the said supplies and goods, and the liability of persons related to such supplies and goods, and take responsibility for their decisions before the owner and law.

c/ Accounting:

The value of irrecoverable actual loss of unsold goods for which a destruction decision has been issued, after being partially offset by the provision for in-stock goods price decrease, shall be accounted as cost of goods sold of the enterprise.

2. The provision for loss of financial investments:

2.1. Covered objects: securities of all kinds and capital amounts invested by the enterprise in other economic organizations, which fully satisfy the following conditions:

a/ For securities investments:

- Being in forms of share certificate, corporate bond, etc., invested in by the enterprise strictly according to the provisions of law.

- Being eligible for free trading on the market and having market prices at the time of inventorying and making financial statements lower than prices recorded in accounting books.

For securities ineligible for free trading on the market, no price decrease provision shall be set up.

Particularly, companies specializing in securities trading business shall not be subject to this Circular's provisions on setting up of the provision for loss of securities investments.

b/ For capital amounts invested by the enterprise in economic organizations being its members, one-member limited liability companies, limited liability companies with two or more members, joint-stock companies, partnerships, joint-venture companies, associated companies, and other long-term investments, a provision must be set up if economic organizations in which the enterprise is investing suffer from loss (except where such loss is already planned in their business plans before investment).

2.2. Method of setting up the provision:

a/ For investment securities of all kinds:

The level of provision to be set up shall be calculated according to the following formula:

Level of provision for securities price decrease

=

Quantity of securities with decreased price at the time of making financial statement

x

Price of securities recorded in accounting books

-

Actual market price of securities

The enterprise must set up separate provisions for each kind of investment securities with decreased price at the time of making the financial statement and present them in a detailed list of provisions for investment securities price decrease, which shall serve as a basis for accounting such provisions as financial costs.

b/ For long-term financial investments:

The level of provision for each financial investment to be set up shall be at most equal to the capital amount already invested and calculated according to the following formula:

Level of provision for loss of financial investments

=

Parties’ actual capital contributions to the economic organization

-

Actual own capital

x

Investment capital

Parties’ total actual capital contribution to the economic organization

- Parties' actual capital contributions to the economic organization are taken from such economic organization's accounting balance sheet of the year preceding the time of setting up the provision (Codes 411 and 412 of the accounting balance sheet, promulgated together with the Finance Ministry's Circular No. 23/2005/TT-BTC of March 30, 2005).

- Actual own capital is taken from the economic organization's accounting balance sheet of the year preceding the time of setting up the provision (Code 410 of the account balance sheet, promulgated together with the Finance Ministry's Circular No. 23/2005/TT-BTC of March 30, 2005).

The basis for setting up the provision is the positive difference between the parties' actual capital contributions and the actual own capital at the time of making the economic organization's financial statement.

The enterprise must set up separate provisions for each lost financial investment and present them in a detailed list of provisions for lost financial investments. This list shall serve as a basis for accounting such provisions as the enterprise's financial costs.

2.3. Handling of the provision:

At the time of setting up the provision, if the prices of securities invested by the enterprise decrease as compared with prices recorded in accounting books, or the capital amounts invested in economic organizations are lost due to loss-making operation of such economic organizations, the provision for loss of financial investments must be set up according to the provisions of Point 2.2 above;

If the financial investment loss provision amount which must be set up is equal to the balance of the existing provision, then the enterprise shall not have to set up such provision;

If the amount of the provision which must be set up is larger than the balance of the existing provision, then the enterprise shall add the difference to its financial costs.

If the amount of the provision amount which must be set up is smaller than the balance of the existing provision, then the enterprise shall refund the difference as its financial operation income.

3. The provision for bad debts:

3.1. Covered objects and conditions: Objects covered by this provision are receivable debts which satisfy the following conditions:

- Being evidenced by original vouchers, with debtors' comparison and certification of unpaid debt amounts, including economic contracts, loan agreements, written records of contract liquidation, debt acknowledgments, debt comparison and other documents.

Amounts with insufficient grounds to be recognized as receivable debts according to these provisions must be treated as a loss.

- Having sufficient grounds to be recognized as bad debts, including:

+ Overdue receivable debts stated in economic contracts, loan agreements or other debt acknowledgments.

+ Undue receivable debts of which the indebted economic organizations (companies, private enterprises, cooperatives, credit institutions, etc.) fall bankrupt or are undergoing dissolution procedures; debtors are missing, have fled, are prosecuted, detained or tried by law enforcement bodies, are serving sentences or have deceased.

Debts which have been overdue for three or more years shall be considered irrecoverable and handled according to the provisions of Point 3.4 below.

3.2. The method of setting up the provision:

The enterprise must anticipate possible debt loss or overdue period of debts and set up provisions for each bad debt, accompanied by evidences proving such bad debts.

- For overdue receivable debts, the level of a provision shall be as follows:

+ 30% of the value of a receivable debt which has been overdue for between 3 months and one year.

+ 50% of the value of a receivable debt which has been overdue for between one year and under two years.

+ 70% of the value of a receivable debt which has been overdue for between two years and under three years.

- For undue receivable debts of which the indebted economic organizations fall bankrupt or are undergoing dissolution procedures; debtors are missing, have fled, are prosecuted, detained or tried by law enforcement bodies, or are serving sentences, the enterprise shall anticipate the irrecoverable loss for setting up the provision.

- After setting up provisions for each bad receivable debt, the enterprise shall present all of these provisions in a detailed list, serving as a basis for accounting them as management costs.

3.3. Handling of the provision:

- When receivable debts are recognized as bad ones, the enterprise must set up a provision according to the provisions of Point 3.2 above. If the amount of the provision which must be set up is equal to the balance of the existing provision for bad debts, then the enterprise shall not have to set up such provision;

- If the amount of the provision which must be set up is larger than the balance of the existing provision for bad debts, then the enterprise shall add the difference to its management costs.

- If the amount of the provision which must be set up is smaller than the balance of the existing provision for bad debts, then the enterprise shall refund the difference as its other incomes.

3.4. Financial handling of irrecoverable debts:

a/ Irrecoverable receivable debts include debts in the following cases:

- For economic organizations:

+ Debtors are bankrupt or dissolved under court decisions on declaration of enterprise bankruptcy according to the provisions of the Bankruptcy Law or competent persons' decisions on dissolution of indebted enterprises. In case of self-dissolution, there must be announcements of dissolved units or certifications of agencies having decided on the establishment of such units or organizations.

+ Debtors have terminated their operation and become insolvent with certifications to this effect, made by agencies having decided on the establishment of enterprises or organizations which have carried out the business registration for such indebted enterprises.

- For individuals, there must be following documents:

+ Death certificates (copies) or local administrations' certifications that debtors have died without leaving inheritance for debt payment.

+ Local administrations' certifications that debtors are still alive or missing but unable to pay debts.

+ Law enforcement bodies' arrest warrants or certifications against debtors who have fled, are prosecuted or serving sentences, or local administrations' certifications that debtors or their heirs are unable to pay debts.

- A competent authority's decision on remission of the enterprise's irrecoverable debts (if any).

For receivable debts which have been overdue for three or more years with insufficient evidencing vouchers or documents as required, the enterprise's debt handling council shall be set up to consider and handle them according to the provisions of this Clause.

b/ Financial handling:

Actual loss of each irrecoverable debt shall be the difference between the receivable debt amount recorded in the accounting book and the already recovered amount (compensation paid by damage-causing person, public sale of assets of indebted units or debtors, assets divided under decisions of the court or other competent authorities).

The enterprise shall use its provision for bad debts or financial reserve fund (if any) to offset the actual loss value of irrecoverable debts, and account the unoffset value as its management costs.

Receivable debts shall, following the issuance of the decision on handling thereof, be separately monitored by the enterprise on its accounting book and accounting balance off-sheet for at least five years and continue to be recovered with different measures. Any recovered debt amounts shall, after subtracting expenses related to the debt recovery, be accounted by the enterprise as other incomes.

c/ When handling irrecoverable debts, the enterprise must compile the following dossiers:

- A minutes of the enterprise's debt handling council, clearly stating the value of each receivable debt, the value of recovered debts, and the actual loss value (after clearing recovered amounts).

- A detailed list of remitted debts, serving as a basis for accounting, a written record of debt comparison certified by the creditor and debtors, or a written record of economic contract liquidation, or certification of the agency having decided on the establishment of the enterprise or organization, or other objective documents proving unpaid debts, and relevant documents.

- The accounting book and documents proving that these debts have not been recovered and, by the time of handling debts, the enterprise is reflecting receivable debts on its accounting book.

d/ Debt-handling competence:

The Managing Board (for enterprises with managing boards) or the Members' Council (for enterprises with members' councils); the general director or director (for enterprises without managing boards or members' councils); or the owner of the enterprise shall base itself/himself/herself on the minutes of the handling council and evidence related to debts to decide on the handling of irrecoverable receivable debts and take responsibility for their decisions before law and, at the same time, apply measures to handle responsible persons according to current regulations.

4. The provisions for warranty for products, goods and/or construction works:

4.1. Covered objects of and conditions for setting up of the provision: Products, goods and/or construction works, which are manufactured, sold or handed over by the enterprise in the year and for which the enterprise has committed in contracts or other documents to provide warranty.

4.2. The method of setting up the provision:

The enterprise shall estimate the level of provision to be set up for warranty for products, goods and/or construction works sold or performed in the year, and set up provisions for each kind of product, goods or construction work for which the enterprise has committed to provide warranty. The total provision for warranty products, goods and/or construction works shall be set up according to commitments made with customers but must not exceed 5% of the sale turnover of such products or goods.

After setting up provisions for each kind of product, goods or construction work, the enterprise shall present all of such provisions in a detailed list, serving as a basis for accounting them as sale expenses.

4.3. Handling of the provision:

At the time of setting up the provision, if the actually paid amount for warranty is larger than the amount set aside as the provision, the negative difference shall be accounted as sale expense. If the warranty provision amount which must be set up is equal to the balance of the existing provision, then the enterprise shall not have to set up such warranty provision;

If the amount of the provision which must be set up is larger than the balance of the existing warranty provision, then the enterprise shall add the difference to its sale expenses.

If the amount of the provision which must be set up is smaller than the balance of the existing warranty provision, then the enterprise shall refund the difference as its other incomes.

Upon the expiration of the warranty duration, if no warranty amount is spent or the set-up provision amount has not been used up, the balance shall be refunded as other incomes.

III. IMPLEMENTATION PROVISIONS:

1. This Circular takes effect 15 days after its publication in "CONG BAO" and replaces the Finance Ministry's Circular No. 107/2001/TT-BTC of December 31, 2001, guiding the regime of setting up and use of provisions for decrease of prices of in-stock goods and investment securities and for bad debts at enterprises, other legal documents providing for the setting up and use of provisions which are contrary to the provisions of this Circular.

2. The setting up of provisions of credit institutions shall comply with the provisions of legal documents guiding the financial regime applicable to credit institutions.

3. Enterprises must elaborate regulations on management of supplies, goods and debts in order to minimize business risks. For debts and goods, such a regulation must clearly define the responsibility of each section or each person for monitoring and managing goods or recovering debts.

Enterprises are strictly prohibited from taking advantage of the setting up of provision to additionally calculate into their expenditures groundless provision amounts with a view to shirking their budget remittance obligations. Enterprises which intentionally commit such violations shall be handled like tax evaders according to the current provisions of law.

4. Any problems arising in the course of implementation should be promptly reported to the Finance Ministry for study, amendment and supplement.